The Old Japan’s Debt Burden is Reaching Its Limits Story

August 31, 2020

That’s a theme we have been hearing for decades. Japan is a huge embarrassment for the deficit hawks. It has a debt to GDP ratio of close to 250 percent, more than twice as high as in the United States, yet it has none of the problems that the deficit hawks tell us will come from high debt.

It currently pays 0.05 percent interest on its long-term bonds. Much of its debt carries a negative interest rate so that its debt burden is currently near zero. This means that in spite of its high debt, the country neither has interest rates nor faces a crushing debt burden.

It also does not have an inflation problem. Inflation over the last year has been 0.5 percent. The country has actually been struggling to raise its inflation rate.

Nonetheless, the NYT quotes an expert telling us that Japan cannot stay on its current course:

“‘When it comes to work style change and faster introduction of digitalization, the shock that came from corona probably made a bigger impact’ than Mr. Abe’s policies, said Takuji Okubo, the North Asia director of the Economist Corporate Network.

“With the economy in crisis, Japan’s next leader ‘needs to move in a different direction,’ he said. ‘The next prime minister will not be able to use monetary policy that much. The room for further expansion, for further easing, is very limited.'”

While Japan’s economy clearly has problems, like all economies, it is not clear what limits it presently faces. Its growth in per capita GDP and labor productivity is not very different than in the United States.

When people want to hold up Japan as a country that is suffering because of high debt, it is mostly just hand waving.  There is little evidence to support this view.

 

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